Structure of the Economy

Gross Domestic Product

Historically, mining and agriculture contributed the most to national
output. With government assistance during and after World War II,
manufacturing grew to become the greatest contributor to overall gross
domestic product, and overall economic growth in the
1960s rivaled that of Japan--averaging 5.9 percent per year in real
terms (compared with the 4 percent annual average growth of the 1950s).
During the 1970s, however, growth in both manufacturing and agriculture
stagnated, and the services sector--especially the insurance industry,
financial facilities, and transport services--became the fastest-growing
economic sector (see table 5, Appendix).

The price of gold was allowed to float (relative to the rand) in the
early 1970s, and by the end of the decade, high prices for gold and
other export commodities sparked a brief economic recovery. Mining
continued to be vital to the nation's economic future, because minerals,
especially gold, dominated exports and influenced the growth of other
major economic sectors, which relied on gold exports to bring in
much-needed foreign exchange. Thus, even as the importance of gold in
the GDP declined, it continued to affect the country's balance of
payments. When gold prices (and export revenues) declined, local
industries often were unable to obtain imports, such as machinery and
other inputs necessary to maintain production; as a result, other
exports also declined.

Economic growth slowed in the late 1970s and the early 1980s, not
only because of declining gold revenues, but also because of rising
prices for oil imports and increased international competition in other
traditional export commodities. The first recession of this period
occurred in 1976, following dramatic oil price hikes. Strong export
growth based on higher gold prices helped the recovery from this
recession, but the country was hit by a series of droughts in the 1980s,
which seriously affected agricultural output. Further erratic changes in
gold prices led to a series of booms and busts, reducing average annual
GDP growth for the 1980s to only 1.5 percent.

Negligible growth in the 1980s led to an overall decline in living
standards, as population growth far outpaced economic expansion. Per
capita GDP declined by more than 10 percent during the decade, and for
the average individual, real wealth in 1990 was no higher than it had
been in 1970.

National economic stagnation continued in the early 1990s. GDP
declined in 1991 and 1992, and registered only weak positive growth in
1993, according to the government's Central Statistical Service. Private
consumption accounted for 57 percent of GDP in 1993, representing a
minimal (0.4 percent) increase over 1992. Private consumption was
constrained by high consumer indebtedness, however, and by concerns over
violence and job security.

National accounting procedures were adjusted in 1994 to incorporate
the economies of the four former "independent" African
homelands--Bophuthatswana, Ciskei, Transkei, and Venda. In addition, GDP
measurements were adjusted upward by 5.6 percent to include a modest
estimate of output in the informal sector, which had been omitted from
national accounts until 1994. The informal sector constitutes a
"parallel" economy, consisting primarily of unrecorded and
untaxed wages, barter trade, and other unofficial receipts. For many
rural families in South Africa, as in the rest of Africa, informal
economic activity accounts for most of the household income.

South Africa's advanced industrial sector made it the twenty-fifth
largest economy in the world, a giant among African countries in the
1990s. Per capita GDP, in 1994, compared with the rest of Africa, was
topped only by the Seychelles, Réunion, and Gabon. With only about 7
percent of the population and 4 percent of the total land area of
Africa, South Africa produced more than one-third of Africa's goods and
services, and nearly 40 percent of its manufacturing output.

External Debt

Loan capital was readily available during the 1970s, and both the
public and the private sectors borrowed heavily, often in the form of
trade credits. Then in the early 1980s, foreign investments declined
relative to the value of foreign loans needed to finance economic
growth. As a result, equity capital dropped as a percentage of foreign
debt from 60 percent in 1970 to less than 30 percent in 1984, while
South Africa's loans grew from 40 percent to 70 percent of foreign debt.
The government encouraged this trend by stepping in whenever foreign
bankers hesitated to increase lending and stabilized indebtedness
through gold swaps or by borrowing from the International Monetary Fund
(IMF--see Glossary). As a result of these policies, South Africa's net
indebtedness to the international banks increased sharply, and about
two-thirds of its outstanding loans in 1984 had a maturity of one year
or less. The banking sector was responsible for 44 percent of South
Africa's foreign liabilities, and a further 16 percent had been incurred
by the public sector. Only about 40 percent were private liabilities.
Britain dominated foreign capital loans and investments, accounting for
about 40 percent of foreign investment in 1985.

South Africa was hit with a major foreign debt crisis in 1985, when a
group of banks, led by Chase Manhattan, withdrew substantial credit
lines. The banks refused to roll over existing loans and called in many
of the short-term loans. As a result, the value of the rand dropped
precipitously, and the government temporarily closed its financial and
foreign-exchange markets. Unable to meet debt obligations so suddenly,
the government declared a standstill on repayments of approximately
US$14 billion of South Africa's US$24 billion total external debt.
Liabilities not included in the standstill were trade credits, loans
from the IMF and central banks, and credits guaranteed by Paris Club
(see Glossary) member governments. Publicly quoted issues of South
African parastatals (state corporations) were also left out.

During the standstill, government officials met with representatives
of creditor banks and drew up a rescheduling plan, which proposed
extending the 1985 debt freeze until June 1987 and repaying 5 percent of
the total outstanding by April 1987. An initial payment of US$420
million was made in mid-April 1986, but additional rescheduling
agreements in 1987 and 1989 extended many of these loans. The 1989
agreement stipulated that the amount of debt remaining in those
categories affected by the standstill, originally amounting to US$14
billion, would be reduced to roughly US$6 billion in four years.

A key problem in repaying its loans was the large, but undisclosed,
portion of South Africa's debt that was denominated in hard nondollar
currencies, but appreciated in dollar terms as the dollar weakened.
South Africa nonetheless repaid between US$1.7 billion and US$1.9
billion of debt by 1990, and some foreign bankers were increasingly
willing to refinance maturing South African credits. For example, US$300
million of US$900 million bearer bonds in deutsche marks and Swiss
francs were rolled over or replaced in 1990.

There was almost no external borrowing by South Africa from 1985 to
1990, so even its slowed schedule of debt repayment made South Africa a
net capital exporter during the late 1980s. South Africa reduced its
total disclosed foreign debt to less than US$20 billion in early 1992,
down from nearly US$24 billion in 1985, according to the South African
Reserve Bank. Currency fluctuations brought South Africa's international
debt back to US$25.8 billion at the end of 1993, including
rand-denominated foreign debt, and that figure continued to increase in
1994.

The government repaid about US$500 million in foreign debt in
February 1994. At that time, South Africa was considered an
under-borrower by conventional financial criteria, with a foreign
debt/export ratio of about 60 percent and a foreign debt/GDP ratio of
15.1 percent, according to South African Reserve Bank figures. Overall,
South Africa posted a net capital inflow of more than R8 billion in the
second half of 1994. Foreign borrowing increased in 1995, when gross
foreign debt rose to nearly 22 percent of GDP.

Inflation

Historically, South Africa's inflation rate was tied closely to that
of its major trading partners. In the 1960s, annual inflation averaged
about 3 percent. In line with world trends, it rose above 10 percent in
1974 and fluctuated between 11 and 14 percent through the early 1980s.
During the late 1980s, however, South Africa's inflation rates did not
decline along with those of its Western trading partners. Inflation
reached a high of 18.6 percent in 1986, forcing a depreciation of the
rand, and it continued in double-digit amounts after that. The erratic
price of oil--a crucial import bought on the black market because of
Organization of the Petroleum Exporting Countries (OPEC)
sanctions--provided a consistent inflationary pressure.

Inflation continued to erode economic strength in the early 1990s,
but declined to 9.1 percent in 1994. Inflation increased in early 1995
under pressure from new social spending, but declined to 8.7 percent by
the end of the year. The lower rate of inflation resulted in part from a
decline in food prices, the relative stability of the rand, and the
lowering of import tariffs. Inflationary pressures persisted in the
increase in credit purchases and strong labor demands.

Economic Distortions and Apartheid

National accounts in 1994 showed a sharp break with the past, as
economic and legal data were reorganized to include citizens of all
races and all jurisdictions, including former homelands. The interim
constitution implemented in 1994 ended the use of racial categories to
determine social and economic opportunity, but the economic system of
the mid-1990s nonetheless continued to reflect some of the economic
patterns that had developed during more than forty years of apartheid.

Creating the homelands and resettling people in them had drastically
changed the country's population distribution and regional economic
patterns in the 1970s and 1980s. Accounting for these anomalies caused
confusion and obfuscation in economic data and analyses. Many homeland
residents were barely able to support themselves, owing in part to the
homelands' arid land, inferior roads and transportation, and
overcrowding; some were therefore forced to travel great distances to
work in "white" South Africa. Many of these workers were
excluded from national accounts because they were not legal residents of
South Africa.

It became increasingly clear in the 1980s that apartheid could not be
implemented as decreed by law, and eventually many official and
unofficial policies allowed some flexibility in its application. In 1986
the government called for "orderly urbanization," under which
a limited numbers of blacks could live in officially "white"
urban areas, as long as housing was available. Few black workers could
afford to take advantage of this policy, however, and demographic trends
did not change noticeably.

By the late 1980s, black poverty was so serious that the government
began to take steps to alleviate some of the most dire impacts of
apartheid. Government statistics then indicated that more than 16
million people were living below internationally determined
minimum-subsistence levels. Using nutritional standards as an
alternative measure, an estimated 2.3 million people were at severe risk
from hunger and malnutrition. In 1988 the minister of national health
and population development characterized the crisis as "worse than
the Great Depression," and in response, the government initiated
food programs and other social welfare initiatives.